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Many economists—including Fed Chairman Ben Bernanke—believe that the recession is over—at least from a technical perspective. Most economists see the recovery as being less robust than usual. This means that there likely will not be strings of positive numbers but instead gains interspersed with occasional monthly reversals. That is what we saw this past week. We are getting the type of recovery that most economists predicted—but equities seem to have forgotten about getting that memo.
 It was not a complicated week for equities. Economic news net showed some retrenchment in August from strong gains in July. Markets simply had built in strong expectations that were not met. Did the economy fall back into recession' Not likely. But equities simply had to get back in line with a sluggish recovery that the vast majority of economists have forecast.
Equities softened notably after the mid-week FOMC announcement. Although investors at first blush read the statement to mean that the economy had been upgraded by the Fed, traders on second thought interpreted the FOMC statement to mean that balance sheet expansion is going to slow soon. Yes, the economy was upgraded but the Fed also was seen as getting ready to pull back on liquidity starting in the near future. In turn, stocks dipped Wednesday afternoon.
Economic news held sway for the rest of the week as existing home sales dropped—in contrast to an expected increase for August. Also, pulling down stocks were a below-expectations rise in new home sales and a sharp fall in new factory orders for durables. Partially offsetting the dour mood were a dip in initial jobless claims and a rise in consumer sentiment.
Equities were down this past week. The Dow was down 1.6 percent; the S&P 500, down 2.2 percent; the Nasdaq, down 2.0 percent; and the Russell 2000, down 3.1 percent.
For the year-to-date, major indexes are up as follows: the Dow, up 10.1 percent; the S&P 500, up 15.6 percent; the Nasdaq, up 32.6 percent; and the Russell 2000, up 19.9 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Yields on Treasuries this past week generally eased on mostly weaker-than-expected economic news. Also, demand has been notably strong at Treasury auctions, reflecting safety concerns over a potential correction in equity markets in the U.S. and overseas.
During the week, lower-than-expected existing and new home sales along with a drop in durables orders weighed on yields. Basically, long-term Treasuries are being supported by a rethinking of the strength of the economy. The recovery is turning out to be sluggish while many in the bond market had grown too optimistic about economic growth.
For this past week Treasury rates were mostly down as follows: 3-month T-bill, up 2 basis points; the 2-year note, down 2 basis points; the 5-year note, down 10 basis points; the 7-year note, down 12 basis points; the 10-year bond, down 15 basis points; and the 30-year bond, down 12 basis points.
 Crude oil prices fell notably for the week on weaker-than-expected economic news and a rise in oil inventories. At mid-week, prices dropped as the Fed’s FOMC announcement was eventually interpreted to mean that Fed balance sheet expansion is continuing but coming to an end soon. Also, the government's petroleum status report showed crude oil stocks rising 2.8 million barrels to 335.6 million in the September 18 week with gasoline stocks up a very steep 5.4 million barrels. Both existing and new home sales came in lower than expected while durables orders posted an unexpected drop--all weighing on oil prices for the week. Improvement in jobless claims and consumer sentiment were not enough to offset the disappointment.
Net for the week, spot prices for West Texas Intermediate dropped a sharp $6.53 per barrel to settle at $65.87 – and coming in $79.42 below the record settle of $145.29 per barrel set on July 3, 2008.
This past week’s economic news was choppy but the news was a net positive—especially with further improvement in consumer sentiment.
 The home sales data were mixed this past week with existing home sales reversing course while new home sales rose further. Existing home sales ended four months of gains, declining 2.7 percent in August to a 5.10 million annual rate. The dip was split between single family homes, down 2.8 percent, and condos, down 1.6 percent.
For perspective, the August dip came after a substantial run up in sales. From April through July, existing home sales had risen a cumulative 15.2 percent. August’s dip is minor compared to the net gain.
Better affordability has been underpinning sales as it likely did in August as well. The median price fell $4,500 to $177,700. Distressed sales made up 31 percent of total sales, unchanged from July. The supply news is a big plus in the report, with months’ supply dropping to 8.5 months—a 2-1/2 year low and compared to July at 9.3 months and August 2008 at10.6 months.
Existing home sales likely rebounded in September as the last day for the $8,000 first-time buyer credit is November 30 unless extended by Congress.
 In contrast to the decline in existing home sales, new home sales edged 0.7 percent higher in August to a 429,000 annual rate. Over the last five months, new home sales have risen a cumulative 29.2 percent. No doubt, sales have been spurred by new home buyer credit and by lower prices and mortgage rates.
The median price of a new home tumbled 9.5 percent in August to $195,200 for the lowest level since 2003, an indication that homebuilders are giving customers big concessions. But low prices are moving homes off the market which is a big plus for future prices and new construction. Months’ supply dropped to 7.3 months which is the lowest level in more than 2-1/2 years.
The approaching end of the $8,000 first-time buyer credit does raise the issue of whether home sales will continue to improve and lift the economy. If Congress extends the credit, sales and construction will likely improve slowly in coming months. If not, the housing sector could stall due to a weak labor market.
 Durables orders dropped notably in August. Was the August report on durables orders a sign that the recovery in manufacturing has stalled' The accurate answer is, “who knows'” While equities voted that the manufacturing recovery hit a speed bump on the report, the key issue to remember is that the durable orders series is probably the most volatile monthly key economic indicator produced by the U.S. government. Durable goods orders in August dropped 2.4, after a revised 4.8 percent surge in July. But excluding the transportation component, new durables orders were unchanged, following an upwardly revised 0.9 percent boost in July.
The drop in new orders was led by transportation, which fell 9.3 percent. Within transportation, nondefense aircraft fell 42.2 percent, defense aircraft declined 10.6 percent, and motor vehicles rose 0.4 percent. Otherwise, new orders were mixed. Showing gains were primary metals, fabricated metals, machinery, and communications equipment. In addition to transportation, weakness was seen in computers & electronics, electrical equipment, and all other.
The latest durables report showed August pulled down largely by nondefense and defense aircraft orders. Also, motor vehicle orders did not rise as much as many expected after the cash-for-clunkers program drained auto inventories. A key point that should not be overlooked is that the government survey sample may not have picked up all of the activity in autos. We likely will get stronger numbers (including revisions) for autos in the next report or two. Basically, the latest durables numbers acted as a reminder that in a sluggish recovery, the monthly numbers are going to be choppy.
 Consumer confidence continues to improve, in line with what appears to be continuing improvement in the jobs market. Reuters/University of Michigan consumer sentiment index rose more than 3 points from mid-month to 73.5, extending a run of momentum. The gain from the final August reading is nearly 8 points. Gains in this report were split roughly evenly between the assessment of current conditions and the assessment of the outlook. The latest sentiment number indicates that the consumer may soon be helping to boost recovery—but still not as much as is typical after the end of a recession.
 There are more signs that recovery is underway. We have had five consecutive gains in the index of leading indicators. This index rose 0.6 percent in August on top of a 0.9 percent jump in July. The latest boost was led by a slowing in vendor deliveries (indicating increased business activity), high long interest rates, and rising stock prices. Contraction in money supply was the biggest negative followed by rising initial jobless claims.
While most economists are saying that the recession is over, the debate continues as to when recovery began. The latest revision to the index of coincident indicators reopens the debate as to whether it began in July. The coincident index was revised higher in July to plus 0.1 percent from an initial reading of flat. The National Bureau of Economic Research (which officially dates the peaks and troughs of U.S. business cycles) heavily relies on the coincident index to peg recessions. But further muddying the waters, the coincident index for August was unchanged. Nonetheless, the recession has either bottomed or recovery has already begun.
 At the end of the September 22-23 FOMC meeting, the Fed announced no change in the fed funds target which remains at a range of zero to 0.25 percent. The monetary policy body stated that the target interest rate will likely be “exceptionally low” for an “extended period.” Importantly, the Fed gave the economy an upgrade, stating “economic activity has picked up following its severe downturn.” In its prior FOMC statement, the Fed merely said “economic activity is leveling out.” The Fed also noted that economic conditions have improved in recent weeks. Looking ahead, the FOMC statement stated that a gradual resumption of economic growth is expected. For now, the Fed sees inflation as subdued due to slack resource utilization.
The Fed did give additional details about its balance sheets plans. The Fed will continue its earlier plans to expand purchases of mortgage-backed securities and longer-term Treasuries. But now the Fed is indicating that it will be leveling out its purchases in coming months.
“To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.”
The Fed clearly sees the need to still support mortgage markets, keeping it liquid and keeping mortgage rates low.
 But the Fed now appears to be engaging in choreographed moves for increased transparency about pending policy moves—especially related to unwinding its balance sheet expansion. The Fed specifically released this past Thursday a news announcement that it is reducing two programs for emergency lending—the Term Auction Facility and the Term Securities Lending Facility.
But the slowing down is a little down the road if you look at the latest weekly numbers for the Fed’s balance sheet. The Fed jacked up its balance sheet in the latest week and it was almost entirely infusions into mortgage markets. Reserve Bank credit spiked $44.1 billion in the week ended September 23 after jumping $19.0 billion the prior week. In the latest period, securities held outright expanded $46.1 billion of which $38.5 billion was mortgage-backed securities. Holdings of Treasury notes and bonds increased $4.7 billion while agency debt rose $2.9 billion. The Fed is clearly still providing substantial support to mortgage markets by keeping rates down. Separately, the trend toward less need for emergency facilities continued. Net portfolio holdings of the Commercial Paper Funding Facility declined $2.0 billion while central bank liquidity swaps fell $2.0 billion also.
Net, the Fed sees the economy improving but still sees the need to keep providing liquidity into financial markets—notably the mortgage market. But the Fed likely will begin unwinding its balance sheet expansion early in 2010 unless the recovery falters.
August data have turned out to be mixed. But after a very strong July for housing and manufacturing, a little slippage should not be unexpected. The economy is still on track for a soft recovery.
The big news for the week is Friday’s employment situation for September—will job losses continue to ease' But we also get an update on second quarter GDP, August personal income and spending, and an early reading on manufacturing with the ISM manufacturing report.
The Conference Board's consumer confidence index rose nearly 7 points in August to 54.1 from July's 47.4. Strength was centered in the expectations index with the present situation index rising modestly.
Consumer confidence Consensus Forecast for September 09: 57.0
Range: 55.0 to 60.0
The Commerce Department’s first revision for GDP growth in the second quarter was unrevised at down an annualized 1.0 percent and was significantly improved from the first quarter’s drop of 6.4 percent. But there was a shift in the composition of components. With the revisions, inventories are lower and final sales are higher—meaning demand is a little better than previously believed and there will be greater need for inventory rebuilding in coming quarters. Final sales are now positive at an annualized 0.4 percent in the second quarter, compared to the initial estimate of a 0.2 percent dip. This follows three consecutive declines. On the inflation front, the GDP price index was revised down marginally to flat from the initial estimate of a 0.2 percent rise.
Real GDP Consensus Forecast for second revision Q2 09: -1.2 percent annual rate
Range: -1.5 to -1.0 percent annual rate
GDP price index Consensus Forecast for second revision Q2 09: 0.0 percent annual rate
Range: 0.0 to 0.0 percent annual rate
The Chicago PMI hit the dead-even 50.0 mark in August, indicating no change in business activity from July and a bottoming for the recession in the region. Chicago's report showed a huge nearly 10-point jump in production to 52.9 in a reading that indicates output actually rose in August. Looking ahead, the new orders index, which point to future production, increased strongly in August, to 52.5 for a 4-1/2 point gain.
Chicago PMI Consensus Forecast for September 09: 52.0
Range: 48.5 to 54.0
Sales of domestic-made light motor vehicles jumped 22.3 percent in August to a 10.0 million annual rate, compared to 8.2 million in July. While domestics saw the government program lift sales, imports benefitted even more with sales surging 33.5 percent for the month. But Ford benefitted more than any other car maker—including imports. It’s just that GM and Chrysler did not get much of a sales lift. Combined sales for domestics and imports of autos and light trucks surged to 14.1 million annualized units, up from 11.2 million the month before and the highest sales pace since 14.3 million for May 2008.
Motor vehicle domestic sales Consensus Forecast for September 09: 8.0 million-unit rate
Range: 7.2 to 9.8 million-unit rate
Personal income in July was unchanged after plunging a sharp 1.1 percent in June from the end of a fiscal stimulus program. The wages and salaries component was sluggish but at least gained 0.1 percent, following a 0.3 percent drop in June. Consumer spending was up 0.2 percent in July but it was mainly the surge in auto sales that brought about a positive number. Meanwhile, the headline PCE price index slowed to a flat reading after surging 0.5 percent in June. The core PCE price index also softened, rising only 0.1 percent after a 0.2 percent boost in June. Looking ahead, a 0.3 percent boost in average weekly earnings for August could keep the wages & salaries component of personal income positive. We will certainly see a surge in PCEs as retail sales jumped 2.7 percent for August. Inflation will be mixed, reflecting a 0.4 percent jump in the CPI and a 0.1 percent increase in the core CPI for August.
Personal income Consensus Forecast for August 09: +0.1 percent
Range: 0.0 to +0.4 percent
Personal consumption expenditures Consensus Forecast for August 09: +1.1 percent
Range: +0.1 to +1.6 percent
Core PCE price index Consensus Forecast for August 09: +0.1 percent
Range: 0.0 to +0.1 percent
Initial jobless claims surprised to the downside for a third week in a row, dropping 21,000 in the September 19 week to a 530,000. There were no special factors in the week. The four-week average, down 11,000 to 553,500, is at its lowest level since January. Continuing claims also fell, down a sizable 123,000 in data for the September 12 week to 6.138 million.
Jobless Claims Consensus Forecast for 9/26/09: 537,000
Range: 525,000 to 550,000
The Institute for Supply Management's manufacturing index in August burst over the dead-even 50 level for the first time since the beginning of the recession to 52.9 from 48.9 in July. We are likely to see further improvement in September as the new orders index jumped to 64.9 in August from 55.3 the prior month.
ISM manufacturing index Consensus Forecast for September 09: 53.5
Range: 51.0 to 56.0
Construction spending edged down 0.2 percent in July after making a partial comeback of 0.1 percent in June. The decline in spending in July was led by a 1.2 percent decrease in private nonresidential outlays while public spending also fell—by 0.7 percent. The good news in the report was that private residential outlays added to the view that the housing sector is recovering with a 2.3 percent boost in July after declining 0.4 percent in June. With the recent uptrend in single-family starts, at least the residential portion of construction outlays is likely to rise in August. However, weakness in other components is likely.
Construction spending Consensus Forecast for August 09: -0.1 percent
Range: -0.4 to +0.5 percent
Nonfarm payroll employment in August fell 216,000, following a decrease of 276,000 in July and a decline of 463,000 in June. By major categories, goods-producing jobs dropped 136,000 in August, following a 122,000 decrease the month before. The slowing in overall payroll job cuts was due to fewer pink slips in the services sector. Service-providing losses were cut in half with an 80,000 decline after falling 154,000 in July. Wage inflation warmed up a bit—likely due to a jump in the minimum wage. Average hourly earnings in August rose 0.3 percent, matching July’s gain.
Nonfarm payrolls Consensus Forecast for September 09: -170,000
Range: -235,000 to -135,000
Unemployment rate Consensus Forecast for September 09: 9.8 percent
Range: 9.6 to 9.9 percent
Average workweek Consensus Forecast for September 09: 33.1 hours
Range: 33.1 to 33.2 hours
Average hourly earnings Consensus Forecast for September 09: +0.2 percent
Range: +0.1 to +0.3 percent
Factory orders rose 1.3 percent in July—the biggest increase since June of last year and extending a run of solid gains. Durable goods orders were particularly strong, boosted by aircraft orders. But looking ahead for August, we already have seen a sharp 2.4 percent drop in durables orders. Still, two factors could lead to an increase in overall orders for August—an upward revision to durables and a sizeable increase in nondurables. A price increase for oil will likely boost nondurables. Also, better data on autos will probably lead to an upward revision to durables. Net, most economists surveyed expect a modest rise in factory orders for August.
Factory orders Consensus Forecast for August 09: +1.0 percent
Range: -0.8 to +1.6 percent
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books.
Econoday Senior Writer Mark Pender contributed to this article.
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